Are You Charging Enough at Your Creative Agency?
Read time: 11 minutes
The creative agency world is more competitive than ever. With competition comes ever improving the quality of work. However, we’re also seeing agencies having to lower their fees to compete with the pricing being offered by other agencies. It’s easy to drop your price to win a pitch and worry about the profitability later, but this is a slippery slope. You’ve got to keep an eye on your profitability and make sure that you’re charging enough. Sometimes a new job simply may not be worth it if you have to lower your price too much to win it.
What is a Pricing Model and Why It Is Important for Your Agency
An agency pricing model is how your agency intends to bill its clients, depending on what your target market is aware of and willing to pay for.
The pricing strategy you select will have a direct impact on how successful your agency is. One mistake that agency owners make is choosing one and sticking with it. Your pricing strategy doesn’t have to be set in stone; it can alter as your business develops and changes. There is always room to experiment with various pricing methods.
To confidently negotiate with clients to ensure project profitability, it’s essential to have a thorough understanding of your pricing model. Understanding the overall picture will help you decide how to charge for your services and what factors to take into account.
Before we get into the various pricing structures that agencies might use, let’s see how a proper cost structure can benefit you:
- Increased profits: By using an agency pricing approach that maximizes your profit margin, you have more room to grow your company.
- Getting the right clients: You can attract your ideal clients if you can align with their expectations right away. People who can’t afford expensive services won’t even think about your offerings, but those who can will want high caliber from your team, fostering long-term partnerships. As a result, improved client retention is another gain for you.
Types of Agency Pricing Models and How to Charge for Each
There are many different pricing structures available, each with special advantages. Consider the following four choices as you determine which pricing model would be the best fit for your creative agency:
1. Hourly Rates Pricing Model
When an agency bills a client based on the cost of one hour of work, this is known as an “hourly rate” pricing model.
When an advertising agency takes on a project, it frequently hires a number of experts with a variety of skill sets, such as graphic designers, writers, and photographers who each command a varied salary. You don’t need to discuss each employee’s wage with your client if they want to know the combined cost per hour; simply calculate a blended rate and include it in your bid instead.
A blended rate, in its most basic form, is when your agency provides the services of two or more employees at the same hourly charge although they are paid at different hourly rates.This is also known as the agency-wide hourly rate, which can be determined by averaging the value of one hour of work accomplished by all your team members.
How to Charge for Hourly Rate Model
First of all, let’s determine your blended rate:
Total base payroll for all billable employees (in this case, 10): $550,000
Divided by the number of ideal billable hours on the account for the year (1,600/employee): 550,000 ÷ 16,000 = 34.375
Multiply times 3 (for overhead) equals the agency blended rate:
3 x 34.375 = $103.125 (we’ll round it down to $100)
This paradigm makes it simple to communicate the invoiced value to clients. For example, if the average hourly rate for 5 team members is $200, you can easily compute your contract value based on the mutually agreed timesheet.
Even if you’re not charging based on hours worked, tracking your time allows you to determine your profitability. You may also want to consider having different hourly rates for each staff person depending on their role in the agency. For example, if a client simply wants a single service—say, content writing—you can charge them based on an hour’s worth of your writer’s labor. This will give you better insight into the profitability of the different types of work you do. Having a solid agency management system in place will make it easy to report on the different values of employee time. Doing this manually is not recommended.
If you have lots of jobs that are being billed based on time & materials, pat yourself on the back because you’re already ahead of the curve. This is the easiest way to make sure that you’re charging enough. Especially if you have rates that differ based on the role of the staff person who is doing the work. For instance, your creative director’s time should be worth more than a junior designer’s.
The hourly rate model puts the agency’s costs first rather than the client, who is supposed to be the hero, in terms of value. Under this arrangement, the profit of the agency is pitted against the client’s bank account. The more time the agency needs to finish the assignment, the more money it receives.
However, if you take too long on a project, the client may lose faith in your creative agency. They can start to wonder how much work is truly being done, what they are really paying for, and whether it is worthwhile to continue working with you.
Therefore, charging hourly is not always possible and more clients are demanding flat fees.
2. Project-Based Pricing Model
Project-based pricing strategy is a technique that charges a set fee per project rather than directly exchanging money for time. Other professionals who offer business services, such as consultants, independent contractors, and freelancers, also utilize it. The project-based pricing estimates are calculated based on the cost of the deliverables or the anticipated project duration.
For customers who must stay within a certain budget, this model works well. They will be fully aware of the cost of their project and the deadline for making payments. There won’t be any unforeseen financial costs, and the timetables are well-known.
You can make flat rates more appealing by emphasizing the advantages a client would experience when they award the project to your agency. The project may be expensive, but the one-time investment may be worthwhile.
How to Charge for Project-based Pricing Model
Charging a flat flee for jobs is becoming more and more common. Competing with the pricing of other agencies makes it difficult to stay profitable with these flat fees. I recently spoke with the creative director at a small agency who described what it’s like to agree to a flat fee that he knew was less than the value of the work they would be providing. It did not sound fun. Especially since his client then constantly requested changes outside of the initial scope of work. These changes were accommodated, included in the flat fee and helped to erase the slim profit margin that their flat fee allowed for. I told him that he wasn’t charging enough. “How am I supposed to charge anymore when my competition is constantly trying to out bid me?”, he asked. The answer is to find a way to bill for the extra time you’re spending.
If you’re charging a flat fee for your work, you’ve got to make sure that doesn’t allow the client to take advantage of you. You will frequently experience project changes while working with the client. Since early projections turn out to be wrong, more work without more pay will reduce agency revenues. Thus, you may need to send the client more bills.
If you have a clear agreement with the client that any changes outside of the initial scope of work will be charged hourly, you’ll be able to maintain a grip on your profitability. Furthermore, you could even lower your flat fee to be more competitive, knowing that if the job gets out of control, you’ll be able to charge for the extra time.
However, not every client will be happy to pay for extra time. The potential for creative growth may be constrained by this concept. Even if great ideas could strike along the way, they typically take more time, reduce revenues, or annoy customers with extra costs. Therefore, make sure you manage your client expectations properly so that they understand how much work is covered in the fixed fee, and what needs to be compensated additionally.
3. Value-Based Pricing Model
This strategy elevates the give-and-take between client needs and agency needs. To achieve a win-win, both parties need to aim for a fair bargain.
The cooperation is extensive and long-term, requiring open, transparent communication from the planning stages all the way to launch. The only real rules are the agreements you reach at the project’s outset and along the way.
Long-term initiatives can pay great dividends by encouraging both parties to focus on the goal and communicate freely about their difficulties. This strategy offers the opportunity to share the risk while developing something completely new. The relationship flourishes, and a win-win result is created as long as the objectives are clearly defined, measured, and attained.
How to Charge for Value-based Pricing Model
Agencies using value-based pricing need to take into account what the clients believe they are worth. You can set pricing that represents the client’s value in your agency services by understanding their willingness to pay and your level of expertise.
The more customers appreciate your work, the higher earnings you’ll get. This creates an incentive for your team to produce high-quality products that surpass what your competitors offer. Everyone benefits in the end because buyers receive an enhanced version of your product while you generate more revenue.
Performance-Based Pricing Model
In this strategy, the agency must decide what metrics, such as leads, traffic, conversion rates, etc., are valuable to the client. You must then demonstrate your expertise and how you can help the client before being paid. The better project outcome, the more you can charge them.
To establish credibility while pitching this agency pricing model, businesses must have a track record of achieving the desired result. Some customers could be wary of this sophisticated and tailored pricing structure. Therefore, to persuade potential clients to spend extra, you must focus on the value delivered rather than the hours spent on the project.
How to Charge for Performance-based Pricing Model
Can you connect your efforts to a specific, measurable result like lead generation? You may set your rates according to how well you accomplish that goal. To charge based on performance, agencies must determine their conversion metrics, the methods used to track conversions, and the dollar amount associated with each conversion. Usually, you can add the performance fee on top of the upfront cost when adopting this pricing arrangement.
5. Retainer Pricing Model
A retainer is a pricing structure built on the understanding that a client would continue to use your services. In contrast to other pricing structures, the consumer agrees to pay in advance throughout a predetermined time period (like monthly, quarterly) for a certain amount of professional work.
How to Charge for Retainer Pricing Model
In the case of a retainer, maintaining profitability is also about managing the client and their expectations. Too many agencies allow their clients to assume that their monthly retainer includes nearly unlimited work. Or that if the agency spends less time, the client should be credited for the time not spent. This is not how a retainer should be managed. For more info on common mistakes made with retainers, check out this blog: 3 Mistakes Creative Agencies Make When Managing Retainers
The key to making sure that you’re charging enough is to evaluate the profitability of completed work, make sure that your hourly rates are appropriate and maintain control over the scope creep that plagues every agency. Keep an eye on things and your profitability will match the high quality of your work.